832.51/860: Telegram

The Ambassador in Brazil (Gibson) to the Secretary of State

13. For the information of the Department and for urgent transmission to Executive Committee of Bondholders Council, from Clark.

[No. 4.] References are to numbered telegrams from Committee to Clark and to the English text of the proposed decree as transmitted to the Department with the Embassy’s No. 58, September 27, 1933.77

I am assured Brazilian Government is preparing decree to be signed tomorrow by which proposed exchange service plan will be amended as follows:
Present grades V and VI consolidated into new grade V.
São Paulo loans in grades III and IV will be transferred to new grade V carrying with them their present proposed exchange allocations which are to be made available to all members of the new grade.
Service of new grade V to be in the same percentage amounts as the old grade V.
Proposed extraordinary exchange of 600,000 pounds sterling for 1931, 20–year refunding loan (No. 3, paragraph 4–A78) increased to one million pounds’ sterling of which half is to go to the refunding loan and half to extraordinary service of members of grade V whose milreis deposits will enable them to purchase more than the regular prescribed percentage grade service. Opportunity to purchase is to be equally available to dollar, pounds sterling, and franc issues. This is intended primarily to care for the São Paulo and Maranhão loans, and without some such provision probably impossible to reduce grade of São Paulo loans or put Maranhão on equality with them. Best information here is that no other loans will have milreis deposits to do more than purchase the grade allotment, and that no other issue than Maranhão has any now existing milreis deposits in banks.
Amortization of grade II reduced and arranged as suggested in No. 3, paragraph 4–C, the saving to go to grade V.
Changes in proposed decree (in addition to mere alterations to cover changes in grading and combining of grades as above outlined) are as follows:
Last paragraph before the heading “Grades V, VI and VII” changed to read as follows:

“The Brazilian balance of payments has now been relieved [by the] liquidation of certain external obligations and having regard to the terms’ of 1931 funding scheme the Federal Government proposes to provide during the period of this plan an amount of not less than one million pounds sterling to be [applied] 50 percent to the redemption of 20-year funding bonds created under the funding plan of 1931 for [and the] remaining 50 percent of this exchange to be allocated with equality of treatment, among such sterling, franc and dollar issues, grouped in grade V, as have available milreis for its purchase, during the period of this plan. In consequence of the terms of this paragraph the milreis deposits in special accounts in respect of the service of the loans funded under the 1931 funding plan will be utilized by Federal Government for redemption of internal debt.”

Add to paragraph 4, “The Government will so far as possible secure the deposit of all milreis in the Bank of Brazil and will see that the Bank of Brazil or other depository bank shall notify the banks of the various loans, of the quarterly amounts of deposits, and how they are employed.”
Insert in paragraph 5, after the words “in existing internal obligations or”, the words “in national productive works”.
Add to paragraph 6: “but no bonds shall be so purchased which are not being regularly served”.
It was not possible to get partial assignment of this contemplated exchange to lower grades.
Add to paragraph 7: “In such review the Government will consult, as it deems necessary or desirable, the representatives of all the principal creditors.”
Add to paragraph 8: “and the payments so made will be stamped upon the coupons”, the unpaid or part-paid coupons are not to be surrendered.
The tables accompanying the decree will be changed in accordance with this plan.
The plan will appear as a Brazilian plan, all reference to Niemeyer being omitted.
The Bothschild representative here has strenuously opposed all changes covered by foregoing paragraphs 2 to 6 inclusive, also paragraph 7 (a), (c), (d), (e). I have reason to think changes agreed upon may be made without further consulting him.
With the exception of desired reduction (which I could not get) in the exchange allocation to the refunding loans and Hague Award, I believe the foregoing gives substantially everything we asked for [Page 614]except an allocation of additional exchange (paragraph 6 of Plan) to the lower grades and in view of combining old grades V and VI and raising percentage of service of new grade V to percentages provided for all grade V, this point seems to have less importance. Furthermore, the most informed view I can get doubts that any considerable additional exchange will be available for the use specified in paragraph 6 of Plan.
Many i’s might be dotted and t’s crossed in a different way but I think these should be overlooked and the substance only considered.
When decree is issued in foregoing terms I shall call upon Minister of Finance and express appreciation of Brazil’s high attitude in initiating this debt service and of the consideration shown toward supplying exchange for the non-Federal loans.
Bouças,79 without whose willing aid any such adjustment as has been made in grading and services would have hardly been possible, leaves by airplane for the United States on Saturday. I bespeak for him every courtesy possible from the Council.
I shall leave by Munson Steamship Line February 1st.
Your 5 received today after foregoing written. I reached an understanding on foregoing basis on Sunday. I fear restricted [suggesting] modification now might jeopardize whole plan; furthermore, I have no doubt every dollar issue in class V would find equally cogent reasons for leaving matter stand as is. You are probably getting echoes of opposition of Rothschild representative here. [Clark.]
  1. Foreign Relations, 1933, vol. v, p. 76.
  2. Reference not clear. There are no paragraphs 4–A and 4–0 (see paragraph 6, infra) in the Executive Committee’s telegram No. 3, as transmitted to the Ambassador in Brazil in the Department’s telegram No. 5, January 8, 1934, 7 p.m., p. 607.
  3. Valentim Bouças, Secretary of the Commission To Study the Economic and Financial Condition of the Brazilian States and Municipalities.